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What Threat for Russia in EU-Ukraine DCFTA?

by Krzysztof Bobiński, Co-chair of the EaP CSF Steering Committee

Russia has little to fear from the introduction of the DCFTA (Deep and Comprehensive Free Trade Area), a free trade deal between Ukraine and the European Union next 1 January, a report prepared in 2014 by a research institute working under the aegis of the Russian Academy of Sciences has concluded.

The report belies concerns in Moscow that the DCFTA will harm Russia’s economic interests. These concerns gave rise to a series of trilateral meetings since last year between the EU, Ukraine and Russia, which were designed to reassure Moscow that it will not suffer as a result of the trade deal.

The meetings at ministerial level have focused on technical regulations, phytosanitary and sanitary, and customs issues arising from the DCFTA. They have taken place against a background of suspicion that Russia’s real purpose is to further delay the introduction of the DCFTA in order to weaken the links between Ukraine and the EU.

The Russian report states that illegal re-export of EU goods from Ukraine to Russia once the DCFTA is in place (an issue previously raised as a major concern) would have a marginal effect on Ukraine’s exports to Russia and would run to a mere 500 million USD or around 3 per cent of its sales to Russia in 2013. In any event, such re-exports could be stopped by stricter application of rules of origin, the report states.

Another Russian concern is that Ukrainian goods squeezed from the domestic market by EU goods as a result of the introduction of the DCFTA would flood onto the Russian market while Russian goods would be pushed out of Ukraine by competition from the EU. But the report estimates that the cost to the Russian economy would be no greater than 440 million USD a year, and that excessive disruption of trade flows could be countered by special trade protective measures.

Russian exporters to Ukraine stand to lose around 1.95 billion USD worth of business once Ukraine adopts EU technical standards arising from the DCFTA. However, the report states that Russian business could, itself, adopt these standards for its own goods and gain access to the Ukrainian market, and also improve its position on the EU market.

In effect, the Russian Academy of Sciences has told its government that Ukraine’s DCFTA with the EU would force domestic Russian producers to improve the quality of their products to the benefit not only of exporters but of the Russian economy as a whole.

The latest trilateral meeting in September ended inconclusively with an agreement to meet again in November 2015 but a date has not yet been fixed for this meeting. Meanwhile, sources in the Ukrainian government insist that the DCFTA will come into force on 1 January 2016.